A View from the Bridge - February 2013

The late great Frank Zappa once released an album entitled “Does humour belong in music?” but the question now on the lips of the European Commission is “Does humour belong in politics?” as the ex-comedian Beppe Grillo led his anti establishment, anti austerity party to 3rd place in the Italian elections with 25.5% of the vote, well ahead of the EC backed technocrat Mario Monti (10.5%). The political deadlock is likely to lengthen Italy’s 2 year recession and spill over into the rest of the Eurozone which, after a fairly benign 6 month period, brings the whole Eurozone debt crisis back to the fore. Despite the clear public rejection of further cuts and tax rises, Berlin and Brussels continue to insist that the austerity programme must continue.

The knock on effect for the UK was more about the currency with GBP having hit a 2 year low the day before on the back of the one notch downgrade from Moody’s, all attention was back on the euro and both currency and interest rates eased. Meanwhile at the Bank of England a move by Mervyn King to increase the current Quantative Easing programme was outvoted and the MPC Committee also forecast that inflation would remain above the 2% target rate for at least a further 2 years. The good news, according to the ONS, was that we never had a double dip recession so we can’t have a triple dip!

The month ahead will be much more about the global economy as US spending cuts of $85bn which were postponed at the back end of last year, start today and that could jeopardize global recovery.

In the Money Markets LIBOR rates remain fairly static, 3mth closed unchanged at 0.51%, 6mth closed 4bp lower at 0.61%. Fixed Term rates (longer than 1 year) all fell but with a continued steepening of the curve, 5 Years closed at 1.05% (-11bp), 10 years closed at 2.02% (-6bp), 20 years closed at 2.88% (-4bp) and 30 years closed at 3.14% (-1bp).

UK Government Bond yields were also lower again with a steepening of the curve. The 10 year UK Gilt Benchmark closed at a yield of 1.97% and the 30 year UK Gilt Benchmark closed at a yield of 3.27%.

Future inflation expectations through Inflation Derivatives fell slightly with 20 year Inflation zero coupon opening at 3.65% and closing the month at 3.61%.

In the Foreign Exchange Market GBP was weaker against the both USD$ at 1.5163 (1.5846) and EURO at 1.1613 (1.1666)

In the credit markets UK Banks 5 years CDS spreads were mostly higher with RBS ended at178bp (unchanged), Lloyds 159bp (+6bp) , Barclays 145bp (+7bp), Nationwide 114bp (unchanged), HSBC 93bp (+12bp) and Santander UK 163bp (-4bp).